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December 22, 2016

Solid U.S. economic performance, and expectations of higher inflation, have prompted the U.S. Federal Reserve to increase its benchmark interest rate by 0.25 percentage points to a range of 0.5 – 0.75 percent. The Fed had last raised the rate in December 2015.

Its updated economic forecast also anticipates stronger economic growth, to 1.9 percent for 2016, and a drop in the unemployment rate to 4.5 percent by the end of 2017. Overall inflation is anticipated to rise to 2 percent over the next couple of years.
Asia Pacific Head of Research for JLL, Dr Megan Walters, says property investors in the region had already expected, and priced in, the 25 bps rate hike.

“The shift in currencies, and thus currency hedging costs, will be the most immediate impact on the real estate markets,” Dr Walters says. “Interestingly, interest rate spreads in the region have seen less upward pressure recently and so have improved hedging costs for USD-based investors coming into the region.”

“Furthermore, the inflation hedging characteristics of real estate as an asset class will continue to attract investors seeking protection against higher inflation.”

JLL predicts country markets will react differently to the rate rise

  • Australia: The Australian dollar will be the main transmission mechanism for the rate increase. While asset yields in core sectors have compressed, investors remain cautious and the spread between property yields and the real risk-free rate is wider than historical benchmarks.
  • Japan: The Fed’s rate hike has pushed the yield spread between the U.S. and Japanese markets wider, leading to a considerable depreciation of the Yen. A weaker Yen supports the Japanese export-oriented industrial property sector, as well as the burgeoning tourism market, delivering benefits for both the hotel and retail sectors. Bank of Japan policies will stabilise yields across the yield curve, easing any upward pressure on capitalisation rates.
  • China: U.S. interest rate movements are likely to have minimal impact on the Chinese real estate market, with JLL analysis showing no correlation between short-term Chinese interest movements and the U.S. economy. Thus, the RMB exchange rate against the U.S Dollar will be the primary transmission mechanism of the Fed’s rate increase. The Government indicates it is not changing policies towards outbound capital. JLL expects the velocity of outbound capital flows to continue into 2017, as part of the structural shift of Chinese capital going global. However, investors finding it difficult to invest offshore may be redirected to examine local assets.
  • Hong Kong: HIBOR rates had already edged higher in anticipate of the US rate increase, and local banks responded by lowering spreads on HIBOR-based mortgages. However, higher financing costs may have been passed on to commercial borrowers. Stiff local competition will likely keep lending rates low, as the Government’s cooling measures continue to reduce transaction volumes.
  • Singapore: SIBOR base rates had already spiked in November, so Singaporean financial markets had already priced-in the Fed’s rate increase. Benchmark borrowing rates continue to remain at low levels, and banks remain willing to lend for both development and completed assets. With conservative balance sheets and low gearing ratios, Singaporean developers and REITs retain the capacity to invest.

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